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July 20, 2010

Analysts Are Not Important to Investors

Analysts are not important to you as an investor. Don’t get me wrong, analysts are important to the financial markets, just not to you as a longer term investor.

Analysts typically work for brokerage firms and express opinions and write reports on the public companies that they follow. They offer different ratings such as buy, hold and sell.

The analysts you regularly see on TV work for brokerage firms (sell side) or investment firms (buy side). They will often times mention their price target for a particular stock and sometimes more vaguely will issue a statement on how a particular stock will perform compared to the market as a whole which is quite weak to say the least. Talk about riding the fence.

Up until recently, analysts did not disclose that they held those stocks in their personal portfolio nor did they have to mention if the firm they work for had received some investment banking fees from that same company they are supposedly impartially reporting on!

You will no doubt have seen an analyst upgrade or downgrade a particular stock due to some important event. What is not widely recognized is that the analyst’s record does not reflect that day’s price action and therefore their record is entirely bogus and unreliable.

Studies show that during the height of the technology bubble in 1999-2000 that over 90% of brokerage firm analysts had buy or strong buy ratings on the stocks they covered at the peak or top of the market.

As a stockbroker, I often times wondered if analyst buy ratings were so the firm could sell inventory to clients? I and you will never know.

Just remember this. There isn’t really any correlation between what happens on Wall Street this morning and your long term investments so ignore the analysts and all the other noise and remain focused on the long term.

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